November 16, 2020


SUB-SAHARAN AFRICA: China, private sector partake in future debt restructurings

BY Malte Liewerscheidt

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On 13 November, the G20 published the anticipated ‘Common Framework for Debt Treatments beyond the Debt Service Suspension Initiative (DSSI)’. In what may be read as a concession to get China on board, the framework refers to debt cancellations as ultima ratio, reserved exclusively for “the most difficult cases”. Nevertheless, the framework also stipulates that debtor countries requesting debt treatment would need to extend to private creditors terms that are “at least as favorable” as those negotiated with G20 official creditors. In line with earlier announcements, this would not only make private sector participation in such debt restructurings mandatory, but would also no longer permit China to distinguish between debt owed to different types of domestic banks. While debtor countries’ requests will provide the ultimate test for clauses pledging transparency and coordination among creditor nations, earlier references to grand-scale debt restructurings of the past appear dead in the water.

In line with the September G7 statement launching the idea of a common framework, requests for broader debt restructuring by DSSI-eligible countries beyond the initiative’s current scope would trigger a mandatory debt sustainability assessment by the International Monetary Fund (IMF) and the World Bank, and a subsequent “upper-credit tranche arrangement.” Key features of a loan arrangement with the Fund under such terms typically include quarterly disbursements and an annual access limit of 100% of a member’s quota; a one- to three-year maturity structure, and a three- to five-year repayment schedule.

The common framework also stipulates that G20 creditors would jointly agree on at least three key parameters, i.e. “(i) the changes in nominal debt service over the IMF program period; (ii) where applicable, the debt reduction in net present value terms; and (iii) the extension of the duration of the treated claims.” In a clause arguably inserted to woo China – which rarely forgives debt – the framework states: “In principle, debt treatments will not be conducted in the form of debt write-off or cancellation” which should be reserved for “the most difficult cases.”

Nevertheless, the framework also tightens the language around commercial creditors, whose involvement in the DSSI has so far remained voluntary. The respective clause stipulates that “debt treatment by private creditors [should be] at least as favorable as that provided by official bilateral creditors” while comparability will be assessed on a basis of “changes in nominal debt service, debt stock in net present value terms and duration of the treated claims.” The de-facto mandatory inclusion of private creditors in debt restructurings beyond the DSSI’s current scope would therefore also include the China Development Bank (CDB), which Beijing has refused to classify as an official bilateral creditor.

While it remains to be seen how transparent and coordinated the G20’s handling of future requests for debt restructuring under the framework will be, it is evident that any broader debt relief option as advocated for by African governments and multilateral agencies is not on the table. In fact, references to past initiatives such as the Heavily Indebted Poor Countries (HIPC) initiative and the Multilateral Debt Relief Initiative (MDRI) were relegated to a footnote, accompanied by the statement: “There is currently no consensus on how these previous options might apply to current circumstances.”

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